An Investor Analyzes: When is the Best Time to Sell Off Your Properties?

Back when I was a listing agent, I often remember people asking me, “Why is the seller selling?”

My canned answer was that they needed the money or wanted to relocate, downsize, etc.

We could probably all list reasons why people sell. What may be more important as a real estate investor is deciding when to sell.

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What Mode Are You in?

Many newer investors are in what I call accumulation mode, meaning that they’re trying to acquire as many cash flowing rental properties as possible. This is where many of us spend a good portion of our investing lives, trying to build wealth.

But as I’ve gotten older, I’ve moved more towards a preservation mode, where my strategy shifted away from acquiring properties and more towards applying my resources to assets that I want to keep in my portfolio long-term (i.e. my best, highest cash-flowing, lowest maintenance assets), as well as paying down the mortgages on them.

At times, I’ve even entered a liquidation mode, as I have other types of assets, both cash flowing and not cash flowing, and I’m often looking to simplify my life. Let’s face it, the more we accumulate, the more work and responsibility we sometimes have.

Real Estate Investing Strategies

When we first start out investing in real estate, certain factors, such as our location, our amount of capital, and our skill sets or areas of expertise, may dictate what and where we buy. Some investors I know started out flipping houses while using profits to invest in some buy and hold properties.

Over the years, my strategy was based off of what I was good at, since I had been a painting contractor and a real estate agent. I liked one to four family residential and modestly priced homes that were often in need of repairs or updating, and I liked areas on the fringe of going down in value that still cash flowed pretty well. These were blue-collar areas, where I’d fix and flip or fix and refinance before they declined.

I would cash flow better than most people that bought retail, but I had a better clientele for tenants than in the lower income wars zones. Some of these areas have continued to appreciate over time, but I’ll never see the type of double digit appreciation my friends in California might see.

I don’t usually see large swings in market value, whether up or down. Now, if I had bought in nicer areas, I might see more appreciation (notice that I said “might”), but I would most likely not cash flow at all, and I would be very lucky to just break even. This is probably why you’ll see investors start to invest outside their areas.

Another strategy for buy and hold properties may be to pay them down or off altogether so as to ensure cash flow and repair money for later years. Some folks refinance into more properties on a continuous basis. Or maybe they utilize a similar strategy to mine and keep re-leveraging their real estate, putting the borrowed capital into hard money deals and notes.

Why Investors Think of Selling

There’s a whole list of reasons why investors contemplate selling, and many times it’s due to the area going downhill or an increase in required maintenance. Or maybe the population is decreasing in the area, jobs are few, or tenant quality is down. Maybe the schools are getting worse, and crime is increasing.

Maybe the investor has little write-offs remaining as far as depreciation or mortgage interest goes.

In my situation, I realized that I don’t want to leave my heirs a bunch of properties and the headaches that go along with managing them. I may not mind dealing with all of that, but I know they would.

Creative Exits

If you’re like me, maybe you’ve come to realize that it’s time to simplify your life and liquidate some properties.

For example, my one friend is selling off some less desirable properties that were paid off and using the proceeds to pay off some of his better properties. He also mentioned that he might sell a property in order to pay off another property that has a mortgage. Even after doing so, his cash flow will stay relatively the same, except there will be one less asset to maintain.

Some of this has to do with market timing. During the last up real estate market in my area, I liquidated about a third of my properties and shifted more into note investing. Now I’m thinking of selling a few more in the next uptick and then paying my remaining gems off as I get closer to retirement age.

Sometimes market timing isn’t in your favor, though, and you still need to liquidate. Well, now it’s time for more creativity, such as selling on lease options, land contracts, or even holding some paper.

So, how do you plan to liquidate some of your real estate, if any, when the time comes?

Leave your comments below!

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About Author

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

15 Comments

Good Article Dave. I have a few guidelines that I look at when it comes time to sell. First, if I am getting less than half of one percent in rent, of the current market value, it is time for me to sell. I sold one three years ago for $360,000 because I was only getting $1,600 in monthly rent. I changed that $1,600 into over $6,000 in rent with a $2,000 mortgage payment across several properties. Next, if my ROI is going to continue to go down annually and I can redeploy that capital for better income, then it is time to consider selling. I sold one this week for that very reason. I put $50,000 down 3 1/2 years ago and selling it now, I am clearing $100,000, between appreciation and note pay down. Plus, the rent was less than 1% of the market value and I can buy where it is more than 1% of market value. Remember, MONEY is your EMPLOYEE, so make it WORK for you in the best possible situation.

You still need an exit strategy, even if the triggering event is to be death. You need to plan how and when to transition properties to your heirs / benefactors to mitigate the tax implications and erosion of value.

I definitely agree with you, Roy. At some point, I plan on sitting down and doing some long-term planning. I’m hoping to live to be 100, but I really should plan for the worst in case that doesn’t happen.

Dave,
Excellent article. I am considering a small sell down of one or 2 properties because of the slowdown in the local economy from oil job loss. I plan to sale the most recently acquired properties because I have less depreciation recapture. If the sales go as planned, the money will be used to pay off 2 mortgages and thus decrease my mortgage payments by over $1,000 per month. This will hopefully give me a margin of safety in case I get a lot of vacancies a year or 2 down the road. My strategy has gone from buy a lot to prepare for the worst.

Good read. One of the first that suggests you might not always want maximum leverage. We are under 10% LTV on our rental portfolio, mostly because most is held in our 401K where non-recourse loans are expensive. Like to bring that up some, but if we maximized LTV, our property management would suck up a lot more time with 40 doors instead of 15. Expanding this way by hiring professional property management, combined with nonrecourse loans doesn’t generate much more income, but instead places us at the mercy of the market.

We went through the same estate thoughts. Having no children, but lots of extended family, we set it up to liquidate and distribute cash. But I hope we spend it all before then!

Good words Dave. As I am getting older, I have turned over more properties to a property manager. I am also selling any properties that don’t generate 1.5% per month. I also really like investing in your funds and letting PPR do all the work!

As a wholesaler . . before I buy them is the best. When I am a rehabber, it would be as soon as I have it rehabbed and get it listed. Now as the landlord, well that depends. . . If I had a portfolio of performing rentals I would first want to sell off the ones that were a pain in the behind or the pocket book and take any profits made to pay down the debt on my cherry rentals. I would rather have high equity or in several cash producing properties, ideally small apartments rather than low equity in a bunch of marginal single family rental properties that cost me a lot of my time.

Hey great article. I currently have a rental property that has appreciated about 100k. The unit is cash positive (barely.) I’ve been considering selling in and using the income to pay off my $60k of student debt which is at %5 interest. This is my only rental property so i’m struggling with what to do. Timing is everything, and being relatively new at this, i don’t know if the time is right.
Any thoughts?

I am definitely in the exit mode but trying to maintain cash flow while selling. Besides paying off mortgages with the sale proceeds I am employing some other strategies to simplify my life from rental properties (I started with 22 rental units spread across 10 properties). Naturally the lowest cash flow, highest maintenance (turnover) properties should go first, but installment sales (taking a note as part of the sales negotiation) are a great strategy to maintain your monthly cash and minimize lump sum capital gains tax. (You get to spread the capital gains tax over the life of the loan.) Of course the flow doesn’t last forever but with some luck you can stretch it a decade or so. I have done one such sale so far, for a 6% interest rate on a 12year mortgage. The cash ($1025 per month) is at least as much as I was making on the rental income and my only responsibilities are to post the monthly payment online, and check once a year to see that property taxes and hazard insurance policy are both paid. Sure beats dealing with tenants and maintenance headaches. So far I have sold two properties and am targeting two more in the next year. Generally speaking, since they are duplexes, I wait until a tenant moves out, do some fix-up, and put the property on the market in case a prospective buyer would like to live in one side. Also makes showing easier with a unit vacant. Current plan is to pause once the next two or sold and see how tolerable it is to manage 14 rental units.